If you’re running a small business in Australia, you could get up to 43.5% back on your innovation spend. The R & D Incentive Australia is designed to reward companies that take risks, experiment, and create new knowledge — but too many owners miss out.
Why Small Businesses Should Pay Attention to the R & D Incentive
Here’s the thing — innovation isn’t just for large corporations or lab coat scientists. It’s for small businesses too. Whether you’re trialling new products, developing software, or experimenting with processes, the R & D Incentive could give your business a significant tax offset and that’s money in the bank.
The power of cash refunds
Imagine spending $100,000 on product development and getting $43,500 back from the ATO. That refund could pay for your next round of testing, help with payroll, or simply give you breathing space in cash flow.
One of my clients, Michael, runs a packaging business. He was testing eco-friendly biodegradable materials but nearly gave up because every failed batch drained his profits. Once we helped him claim the incentive, he received over $120,000 in refunds — money that kept his doors open and secured a major supermarket contract.
He told me, “I thought this program was for big labs, not me. This literally saved my business.”
What Is the R & D Incentive Australia?
The Research and Development Tax Incentive is a federal program aimed at encouraging companies to invest in innovation.
- For companies with turnover under $20 million, it provides a 43.5% refundable tax offset.
- For larger companies, the benefit is a non-refundable offset at a lower rate.
In short: if you’re a small business pushing boundaries, you can potentially turn R&D costs into cash refunds.
Who Qualifies for the R & D Incentive?
To qualify, your business must:
- Be a company incorporated in Australia (sole traders, partnerships, and trusts don’t qualify).
- Spend at least $20,000 on eligible R&D during the financial year. (Unless you use a Registered Research Service Provider).
- Conduct activities that meet the core and supporting R&D activity criteria.
Core R&D activities
These are experimental activities carried out for the purpose of generating new knowledge. They must involve systematic experimentation, evaluation, and technical uncertainty.
Examples:
- Writing new algorithms in software development.
- Developing fire-resistant cladding for construction.
- Testing new drought-resistant crop strains.
- Creating innovative medical devices.
Supporting R&D activities
Activities directly related to core research, such as feasibility studies, prototype building, or certain design and testing tasks.
What Expenses Can You Claim?
This is where it gets real. The tax offset applies to a wide range of expenses, but only if they’re directly linked to R&D.
Eligible expenses
- Employee salaries (for staff working on R&D).
- Contractor or consultant fees.
- Overheads like electricity or rent used in the R&D process.
- Prototype and testing materials.
- Depreciation of R&D equipment.
Non-eligible expenses
- Marketing and sales costs.
- Legal and patent expenses.
- Routine maintenance.
- Cosmetic changes that don’t involve technical uncertainty.
Pro tip: Keep separate records or cost centres in your accounting system to make life easier at claim time.
How to Apply for the R & D Incentive
The process is straightforward if you know the steps:
- Identify and document activities early. Don’t wait until tax time — track experiments as they happen.
- Register with AusIndustry. You must do this within 10 months after the end of your company’s income year.
- Lodge the R&D Tax Incentive Schedule with your company tax return.
- Provide evidence. Keep experiment logs, board minutes, timesheets, and financial records.
- Seek advice. Working with an accountant experienced in R&D claims maximises your benefit and reduces audit risk.
Common Mistakes Small Businesses Make
The ATO and AusIndustry have increased compliance reviews. To avoid getting caught out:
- Don’t miss the AusIndustry deadline. Late registrations are not accepted.
- Don’t overclaim. Only genuine R&D activities qualify.
- Document everything. Without evidence, your claim may be denied.
- Own the intellectual property. You must benefit from the R&D results.
The Audit Process: What to Expect
If your claim is reviewed, regulators may ask for:
- Experiment records and data.
- Timesheets for staff involved in R&D.
- Board minutes showing decisions about R&D.
- Contractor agreements.
Risk: If your claim is rejected, you may have to repay the refund with penalties and interest.
This is why proper documentation matters.
Practical Tips to Maximise Your Claim
- Set up a separate R&D cost centre in your accounting software.
- Train your team to log time and results of experiments.
- Keep a simple project logbook (a spreadsheet is fine).
- Use project management tools like Trello, Asana, or Jira to track progress.
- Check in with your accountant quarterly to stay on track.
Helpful Resources
- The ATO provides guidance on R&D eligibility here: ATO R&D Tax Incentive
- AusIndustry offers information on registering activities: Business.gov.au R&D Tax Incentive
Ready to Take the Next Step?
If you think your business may qualify, don’t leave money on the table.
👉 Book a meeting with me today: Book here
👉 Download our free guides to get more insights: accountantbusiness.com.au/our-guides
Take action now — your next big innovation could be funded by a government refund.
